Margins, markups, agency fees, candidates wages… Does it give you vertigo?
Have you sometimes wondered why your recruitment agency bills ended up more expensive than you expected them to be?
Have you been perplexed by discussions about margins or mark-ups?
Have you been frustrated to discover the existence of ‘temp-to-perm’ fees?
No more (bad) surprises – here are our 3 top tips to help you with your recruitment agency invoices!
Tip #1 – Ask agencies to break down their fees
Often, companies recruiting with the help of recruitment agencies complain about how expensive agency fees are.
If you type ‘recruitment agencies fees’ in Google, you typically find lots of articles along the lines of ‘recruitment agencies are expensive’ (for the most polite of them!).
According to a survey presented in HR Magazine, three quarters of UK businesses claim to feel ‘ripped-off’ by the rates recruitment agencies charge.
I think there are actually two issues:
- companies don’t understand the recruitment agencies’ fee structure, particularly when it comes to temporary recruitment…
- … and recruitment agencies don’t communicate well about it.
What you need to understand is that what you see in your bill is not just the candidate’s basic pay + the agency’s margin or mark-up.
Recruitment agencies bear statutory costs on their workers, just as you do for your permanent employees.
You might not be aware of this, but when you recruit a temporary candidate via a recruitment agency, there are three very distinct components in the invoice:
- To start with, the candidate’s basic pay, typically expressed as an hourly or daily rate
- Then, the candidate’s payroll costs, which are statutory costs that the agency has to pay for – this includes the candidate’s NI (National Insurance), statutory sick pay and holiday pay
- And finally, the agency’s margin or mark-up (more on this below), for the time spent sourcing relevant candidates. Generally, the typical recruitment agency margins in the UK are around 15% – 19% on temporary placements but this depends on the specificities of the role (location, sector).
Source: Recruitment and Employment Confederation (REC) – 2016/17
Ask your agencies to break-down their fees to have a better understanding of what you’re actually paying for.
Tip #2 – Clarify your weekly total
Agencies sometimes use a subtle vocabulary that can increase your agency bill by a few percentage points. It might not sound like much at the start, but can mount up after a few months!
A bit of vocabulary to start with – the difference between mark-ups and margins… The proof is in the equation…:
- Mark-up are calculated as: (Selling price – Cost Price) / Cost price
- Margins are calculated as: (Selling price – Cost Price) / Selling price
Let’s take an example which will make it much simpler.
Imagine that your candidate is paid £100/hour (basic pay + payroll costs).
- With a 20% markup, you end up paying £120 / hour in total.
- With a 20% margin, you end-up paying £125 / hour in total, an extra 4% on your bill.
It does not sound like much, but after a week, it mounts up to a difference of £185. After 3 months, £2,330, which is not negligible!
In doubt, you can find a very useful margin and markup calculator here.
So be quite wary when you hear your agency speak about margins or markup – clarify with your agency what your weekly total will be!
Tip #3 – Clarify the “temp-to-perm” fees
If you’re considering recruiting a temporary member of staff through a recruitment agency with a view to offer him or her a permanent role, be aware that agencies can charge a ‘temp-to-perm’ fee, on top of the agency fees that you’ve already paid.
- Why do agencies charge a ‘temp-to-perm’ fee?
Because temporary workers are the employees of the recruitment agency. By becoming permanent in your company, agencies have a loss of revenue, as they could have placed their temporary worker and earned money.
They cover this loss through a ‘temp-to-perm’ fee.
- What are the average ‘temp-to-perm’ fees?
This fee is typically set around 15% of the worker’s first salary.
Note that by law, if you refuse to pay the ‘temp-to-perm’ fee, the agency must offer you the alternative of an ‘Extended Period of Hire’.
This means that the temporary worker will continue to work for you but be employed by the agency for the rate that you agreed, during a fixed period of time, after which he/she would become permanent in your company.
Typically, the ‘extended period of hire’ represent the same value as a ‘temp-to-perm’ fee, so there is no real benefit in refusing to pay the ‘temp-to-perm’ fee.
- Where do you find the ‘temp-to-perm’ fee?
It’s typically written in the agency’s terms and conditions or terms of business, when you sign a booking, i.e., the contract to employ an agency’s candidate.
So, don’t forget to read the small print – it can be time consuming to start with, but you will thank us for it in the future!
One final thing before you go…
At TempaGoGo, we ask agencies to disclosed transparently their fees, and to break them down between candidate’s basic pay, statutory fee and the recruitment agency’s margin.
- Because we believe that a number of companies are not aware of the statutory costs that agencies have to bear. Companies are under the impression that agencies are more expensive that they actually are.
- Because we believe that transparency encourages trust. As you know, we are all about building mutual trust between companies looking to hire and recruitment agencies, to encourage better recruitment practices!
- Because, when you want to select candidates based on their skills, experience, and price, it allows you to compare apples to apples (I should have said mango to mango…)!
Did it help? Are there other top tips you would like to share with your fellow hiring managers or things you wished you had known prior to using a recruitment agency?
Please let me know – I’m looking forward to hearing from you!
Caroline from TempaGoGo